Anexo III: Diapositivas de la sesión original

The sample has been restricted to 31 countries over a period of 1995-2007 due to the availability of bank data. First of all, data on foreign bank ownership is mainly available from 1995 and restricts the period sample to 1995-2007. Secondly, while data on foreign bank ownership is available for more than 31 developing countries, data on government ownership of banks for many countries is available for only 2001, 2003 and 2008. This restricted us to rely on previous studies and Bankscope to collect data on government ownership of banks. Due to time constraints and access to the Bankscope database, data collection for state owned banks from Bankscope and other relevant sources was restricted to 31 countries for the time period under consideration. In this section, we describe how the variables are measured. However, in the Appendix 2.6, we give some useful information on why we chose some of the variables.

1. Manufacturing Value Added Growth

The annual growth in manufacturing value added MVAGR is a basic indicator to measure a country’s country level of industrialization (Source: World Bank WDI). The growth in manufacturing value added is measured as the change in log of real value added of the manufacturing sector on a yearly basis between 1995 and 2007.

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2. Bank Concentration

Bank Concentration is formally known as the ‘k-firm’ Concentration Ratio and is defined as

the sum of the market shares of the K largest firms in the market (Scherer, 1980; Clarke, 1985; Carlton and Pearloff, 1994). In other words, a one-industry firm will have a concentration ratio of 100% since all the value added in an industry is by a single firm. An industry with ‘n’ firms has a total value-added of in a descending order. Industry value added is defined as , and therefore the market share of the ith firm is . The ratio

is hence defined as:

, (2.10)

Where BCON is the bank concentration ratio, K is the weight attached to the bank share of a

particular bank, and = , where is the share of bank i assets to total banking industry

assets. In this ratio, equivalent importance is given to the x largest banks but it overlooks the remaining banks in the banking industry. In this study, the 3-bank concentration ratio is used to represent bank concentration ratio (i.e. ‘k’ = 3) (Source: Beck et al. 2013).

3. Foreign Ownership of Banks

Foreign bank ownership FBANK is mainly measured as the share of banking assets owned by foreigners to the total assets of a banking market (Sources: Claessens et al. 2008); Cull and Martinez Peria, 2011; and Cleessens and van Horne, 2012-but we checked to ensure that there was consistency between the different sources).

4. Government Ownership of Banks

Similarly, state ownership of banks GBANK is mainly measured as the share of banking assets owned or controlled by the state to total banking assets. In this study, we have made use of data from Barth et al. (2001, 2003, and 2008), Bankscope, and other sources which include previous studies and relevant websites. Data from Bankscope was calculated in a manner similar to Cornett et al. (2009).29

29

First of all, we calculate the proportion of government ownership bank in each bank by first multiplying the share of each shareholder in a bank by the share the government owns in that shareholder, and then add the resulting products over the shareholders of the bank.

, ( 1.... ) i x i n i i x S x  1 1 K K i i i i x BCON S x   

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5. Bank Development

Bank development BNKDEV is measured as private credit by deposit money banks to GDP (Source: Beck et al. 2009).

6. GDP Growth

GDP growth GDPGR is measured as the growth in real GDP (Source: World Bank WDI). Theoretically, economic growth is identified as one of the determinants of industrialization. However, the endogeneity of economic growth makes it possible that industrialization affects economic growth. We try to mitigate the problem of endogeneity by ensuring that GDP growth is lagged.

7. Trade

International trade or trade openness TRADE is measured by the ratio of the sum of export and import to GDP. Data is in constant 2000 US$ (Source: World Bank WDI).

8. Exports and Imports

Exports EXPGDP and imports IMPGDP have been measured as a ratio of total exports to GDP. Data are in constant 2000 US$ (Source: World Bank WDI).

9. Human Capital

Human capital HUMCAP is measured as a ratio of health expenditure (private plus public) to GDP. Data are in constant 2000 US$ (Source: World Bank WDI).

10. Institutional and Regulatory Variables

 Entry into Banking Requirement Index (BNKENTRY): This index measures the conditions that are required for entry. It identifies weather different types of legal documents are required to obtain a banking license (Barth et al., 2004). Data is gotten from the World Bank ‘Bank Regulation and Supervision’ database compiled by Barth et al. This index requires 8 ‘yes’ or ‘no’ questions to be answered where

‘yes’ is equal to 1 and ‘no, is equal to 0. The answers are summed up and the index is generated. Higher values indicate greater entry restriction.

For bank concentration, a significant positive correlation with BNKENTRY would indicate that increasing bank entry restrictions would improve the effect of bank concentration on industrialization, while a negative significant sign would indicate that reducing bank entry restrictions would negatively influence the effect of bank concentration on industrialization (Fernandez et al, 2010). On the other hand, Barth

et al. (2004) and Demirguc-Kunt et al. (2004) argue that increasing bank entry restrictions would only make the banking system less efficient.

With regards to foreign bank entry, strict entry restrictions are associated with bank fragility (Barth et al. 2004). In other words, strict bank entry restrictions should worsen the effect of foreign banks on industrialization in developing countries. However Claessens et al. (2001) suggest that relaxing barriers to foreign bank entry can have a negative effect on the domestic economy, in particular, by increasing competition and reducing profitability of domestic banks; foreign bank entry may reduce the charter values of domestic banks, thereby making them more at risk. This may be detrimental for the banking system particularly when domestic regulation and supervision is weak. In other words, competition between domestic and foreign banks is deleterious for industrialization in developing countries.

Barth et al. (2004) suggests that bank regulations and supervisory practices are closely associated with the degree of government ownership of banks, suggesting that state ownership of banks is positively associated with tighter restrictions on bank entry. However, the expected conclusion of this relationship might depend on the impact of state ownership of banks on economic growth. For example, in La Porta et al. (2002), state ownership of banks is responsible for lower economic growth. In this case, we would expect state ownership of banks to be positively associated with strict bank entry restrictions. On the other hand, Andrianova et al. (2012) suggest that government ownership of banks has been associated with faster long-run growth. In this case, we would expect state ownership of banks to be negatively related to strict bank entry restrictions.

The first case is likely to be valid when a country is just coming out of a banking crisis30. After a banking crisis, the country is more open to both domestic and foreign banks to help recapitalize the domestic banking system after stability has been restored, thereby suggesting a negative relationship between government ownership of banks and strict entry restrictions.31

Based on these assumptions, it is possible that

30

This in no way restricts the positive effect on industrialization after banking crises; state banks can have positive effects regardless of previous banking crises. For example, Korea’s industrialization has unarguably been supported by state funding.

31 _{A positive relationship between government ownership of banks and strict bank entry restrictions is also}

possible when government ownership of banks has a positive effect on economic growth. This argument has been explained in Stiglitz et al. (1993) under the sub-topic, ‘Competition from Foreign Banks’.

the effect of bank entry restrictions on how state banks affect industrialization may depend on the aggregate impact of state banks on the domestic economy.

 Regulatory Restrictions on Activities and Ownership (RESTRICT): This index measures the extent to which banks are allowed to participate in fee-based rather than the more traditional interest-based activities, as well as the ability of banks to own and control non-financial firms (Barth et al., 2004). The fee-based activities include securities activities, insurance activities, and real estate activities. Four questions are asked in relations to the fee-based and ownership activities where the following options are available: Unrestricted, Permitted, Restricted and Prohibited and they represent 1, 2, 3 and 4 respectively. The respective answers are summed up to get the index, with higher value indicating more restriction. Data is gotten from the World Bank ‘Bank Regulation and Supervision’ database compiled by Barth et al. (2004). Similar to bank entry restrictions, the intuition is the same for bank restrictions on activities and ownership if we get significant positive or negative signs for bank concentration.

 Regulatory Restrictions on Ownership (RESTOWN): This index measures

restrictions on the ability of banks to own and control non-financial firms (Barth, et al., 2004). Four questions are asked in relations to the fee-based and ownership activities with where the following options are available: Unrestricted, Permitted, Restricted and Prohibited, where they represent 1, 2, 3 and 4 respectively. The higher the values, the more the restrictions over banks owning non-financial firms. Data is gotten from the World Bank ‘Bank Regulation and Supervision’ database compiled by Barth et al. (2004). Similar to bank entry restrictions and restrictions on activities and ownership, the intuition is the same for bank restrictions on ownership, if we get significant positive or negative signs for bank concentration.

 Economic Freedom Index (ECONFREE): The index ECONFREE is an index that comprehensively measure economic freedom and is also available for an extensive number of countries. The index examines economic freedom from 10 perspectives. Economic freedom has external features – such as investment and trade liberalization – as well as internal features – such as the ability of entities to use labour and finance freely without any government restrictions. This index is an average of 10 individual freedoms –business freedom, trade freedom, fiscal freedom, government spending, monetary freedom, investment freedom, financial freedom, property rights, labour freedom and freedom from corruption - that individually has

a scale of 0 to 100, higher values indication higher freedom (Miller and Kim, 2011). Data has been made available by Heritage Foundation.

 Private Monitoring Index: This index MONITOR, measures private sector monitoring of the banking system. It is measured using four indicators - certified audit required, percent of 10 biggest banks rated by international credit agencies, no explicit deposit insurance scheme, and banking accounting -where ‘yes’ represents 1and 0 otherwise (except for the second indicator which represents 1 if it is 100 percent and 0 otherwise). Higher values indicate more private supervision (Barth et al., 2004). Data is gotten from the World Bank ‘Bank Regulation and Supervision’

database compiled by Barth et al., (2004). The new Basel Accord presupposes that both stringent official supervision and private monitoring promotes stability in banks. However, Barth et al. (2004) find that policies that promote effective monitoring by the private sector seem to be better for bank development and stability than policies that promote official supervision. Barth et al. (2006) and Beck et al. (2006b) are two other studies that support the effectiveness of privately monitoring banks. On the other hand, Fernandez et al. (2010) finds that increasing effective monitoring by the private sector worsens the effect of bank concentration on industrialization.

 Accounting and Information Disclosure Requirement Index: The Index ACCOUNT, measures the extent to which banks are required to make accounting and information disclosure public. It is constructed from 3 ‘yes’ and ‘no’ questions related to bank income statements, interest rates, non-performing loans, and providing consolidated financial statements. Higher values indicate more informative bank accounts (Barth

et al. 2004).

With regards to bank concentration, the story is that information disclosure reduced information asymmetries (in the presence of which bank concentration may have a positive effect) and, therefore, the positive effect of market power starts to dominate the negative effect (in terms of amelioration of information asymmetries) of bank concentration. This position reflects the assumption that the market is best. But if there are market failures (e.g. Da Rin and Hellmann, 2002), where banks need adequate profits to fund industrialization, then disclosure could increase the positive effect of bank concentration since it increases the quality lending decisions. However, Fernandez et al. (2010) argues that improving disclosure would cause bank concentration to negatively affect industrialization in developing countries.

For foreign banks, it has been suggested that, although they are seen to be more efficient and profitable, they have less knowledge of the market than domestic banks (Mian, 2003). Therefore, they are likely to have a more positive impact on industrialization if disclosure of accounting and information is high. Also, Berger et al. (2008) suggest that foreign banks in India only develop lending relationships with transparent firms because they are able to use their advantages into processing hard information of more transparent firms.

Regarding state ownership of banks, the World Bank (2001) and Micco et al. (2007) points that because the government may use state banks to bolster their political support, and therefore, cause the allocation of credit to respond to opportunistic criteria rather than efficiency. Better quality of information and accounting disclosure and the demand for it can improve state bank lending behavior and make their allocation of credit to be more efficient. In other words, improving accounting and information disclosure is likely to improve the effect of state banks on industrialization.

 Property Rights Index: This Index PROPRITE is a component of the index of economic freedom by the Heritage Foundation. It emphasizes the ability of entities to accrue private property, protected by defined laws that are effectively enforced by the government. It measures the extent to which a country’s laws protect private property rights and the degree of enforcement by the government. It also explore the possibility that private property rights will be expropriated and evaluates the autonomy of the courts, the existence of corruption within the courts, and the capacity of individual and business entities to enforce contracts (Heritage Foundation,2013).

 Governance: This index GOV is broadly defined as the traditions and institutions by which authority in a country is implemented. It includes the procedure that chooses and replaces governments; the ability of government development and application of sound policies; the respect of citizens; and the governance of the institutions that administrate economic and social relations amongst them (Kaufmann et al. 2002). Data on perceptions of governance are based on six point perspectives: voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, the control of corruption. Each of these indices has a scale of -2.5 to 2.5, with higher value indicating better governance. The governance

index is an average of these six indicators. Data is made available by the World Bank on the ‘Worldwide Governance Indicators’ complied by Kaufmann et al.

 Law and Order Index: We have also used the law and order index LAWORDER to

measure institutional and legal systems quality. The law and order index is published by ICRG. They define the index to measure the legal system of a country as well as the rule of law. It has a scale of 0-6 but was changed to a 0-10 scale by La Porta et al. (1998), with higher values indicating the existence of high integrity in the legal system and the acceptance of citizens of legal mechanisms to settle disputes (Burki and Perry, 1998). Data is made available on Rafael La Porta’s website.

For foreign banks, the literature suggests increased entry into developing countries when the rule of law is respected and properly enforced. For example, in Andrainova et al. (2008), a country’s banking sector would not attract significant foreign entry if

the rule of law is weak and corruption is widespread. Also, Focarelli and Pozzolo (2005), points that the presence of stronger law-and-order tradition in a country increases the probability that it would host foreign banks. Therefore, it is expected that foreign banks should improve industrialization in countries with a strong law- and-order.

Regarding state banks, poor quality of institutions might not be to only impediment that weakens its effects in developing countries. Andrews (2005) suggest that a weak law-and-order tradition can cause serious short-comings on how state banks affect the economy. In other words, in countries where the rule of law is respected and effectively enforced, state banks are seen to perform better.

 Official Supervisory Index: This index OFFICIAL measures the extent to which official supervisory authorities have the authority to take specific actions to prevent and correct problems. It is obtained by adding a value of one for each affirmative answer to 14 questions intended to gauge the power of supervisors to take specific actions to prevent and correct problem (Barth et al., 2004). Data is gotten from the World Bank ‘Bank Regulation and Supervision’ database compiled by Barth et al.

 Banking Freedom Index: The banking freedom index BNKFREE represents the financial freedom index-a component of the index of economic freedom from the Heritage Foundation-and it measures banking efficiency as well as the independence from government control and intervention in the financial system-and we use it to measure government interference in the banking system. This index is constructed

based on 5 extensive areas: the extent of government regulation and services of financial services; the degree of state intervention in banks and other financial forms through direct or indirect ownership; the extent of financial and capital market development; government influence on the allocation of credit; and openness to foreign competition (Heritage Foundation, 2013). It has a scale of 0-100, with higher values indicating less government interference. The standard results in the literature would suggest that, with high government interference, the effects of bank concentration are worse (Cetorelli and Gambera, 2001). Also results from Barth et al. (2004) and Demirguc-Kunt et al. (2004) equally suggest that government intervention through excessive regulatory restrictions will make the banking system less efficient and supports the standard results in the literature. However, according to Fernandez et al. (2010), excessive government intervention in the banking system has the potential to reduce the negative effects of bank concentration on industrialization.32

 Rule of Law Index: The rule of law index RL is another index we use to measure the quality of institutional and legal systems. It is a component of the Governance index by Kaufmann et al. The rule of law index comprises indicators that measure how well economic entities respect the rules of society. These indicators include perceptions of the prevalence of crime, the effectiveness and integrity of the courts,